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Market Wrap
Inflation concerns and negative signals from China have weighed heavily on the markets, with the current COVID-19 wave indicating that supply chain problems could escalate further. As a result of increasing probabilities of a 75bps Federal Reserve rate hike, investors are also positioning themselves ahead of the Fed announcement on Wednesday. If the FOMC stick with its original plan of 50bps over the next two meetings there is a possibility that the markets have overshot the mark and we could see a reversal following the press conference. But with CPI up at 8.6% has pushed the consensus that things are going from bad to worse for the central banks in their quest to tame inflation by killing demand.
The US 10-year yield is often cited as the benchmark yield, but the Fed have most control over the shorter-term yield curves. Especially the 2-year and below. The 10-year is now pushing higher towards the 3.8% and a swing high from 2011, having breached the most significant high from 2018. In 2018 the worry of yields above 3% were that we would have a sell-off in the equities. Those fears are now manifesting but have more weight, as the leveraging during the expansion after COVID in 2020 will exacerbate the problems of having a lot of debt with higher interest rates.
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The S&P500 has dropped hard along with the other US major indices and within the index there are only around 19% of companies trading at or above their 200-day moving average. The Nasdaq has led the way lower with a near limit down day, and currently trading -4% (at the time of writing). Over the last week of trading activity, the Nasdaq is down -9.94%, with only the Italian bourse lower, coming in at -11.04% over the last 7 days. Gold has also plunged more than 2% and silver has lost as much as 4% amid this major sell-off.
There is a big US corporate tax payment due in this week which will be a liquidity drain on the markets. If it were not for the rising cost of energy and inflation, I would put todays moves down to uncertainty around the Fed but also at the need to find a liquid asset to sell, to pay the tax. If that had been the dominant fundamental driver, we would be expecting a higher close later in the week.
It now makes sense that the S&P500 reaches for the weekly 200-period EMA and for investors to get another chance to buy the index off the dynamic support. Though a close below and we could be in for a really wild ride lower.
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The EURUSD has reached my initial profit target but rather than closing out, I have been taking partial profits along the way to the target. If we do now see a capitulation in the single currency, I have a little left on as a runner, but also have some spare capacity to put a new trade on, should we get a set up this week.
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Following the disappointing UK GDP estimate this morning the pound against the dollar has swept the significant swing low. There has been a little buying pressure come in, which could be the buy stops being triggered. A close below the current low and momentum should keep things going south until the Bank of England MPC meeting on Thursday.
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The AUDUSD has also kept pushing for the lows as China signals more problems arising due to a resurgent COVID outbreak. The US dollar strength is also not very good for the commodity pairs in general.
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The USDCAD is up 2.11% over the last trading week and that takes it up to 1.62% for the year to date. The yearly and weekly average price are 1.26272 and 1.26314 respectively as shown by the 200-period average. I am looking for a reversal between 1.2900 and 1.3000 off a Fibonacci level. But if energy were to fall due to a change in demand, the USDCAD could be targeting the 1.3100 and above.
